How did you buy your second investment property?

23 Replies

A lot of people talk about how they got the downpayment for their first property, whether it was by saving their money, working with an HML, getting it from friends and family, but once you get your first rental property and it's cash flowing say, $500/month where do you get the cash for a downpayment on your next property.

By my math, even a good cash flowing property that's getting it's mortgage paid down would still take 2-3 years until you could refinance for a down payment on a second property. Is there something I'm missing when I hear about people buying "6 investment properties in one year"?

@Daniel Hyman Could you expand on that a bit? I understand what you mean generally, but perhaps you could give a specific example?

I actually sold my house so i could have the $$ to invest in more MF units.  My thinking is that a house for me has little tax or financial benefit while investment property does. 

So now I rent! And have the cash for a nice DP on a bigger deal. 

Well for starters You buy right and after a year you brrr the property . You live frugal and take every penny of profits from the rentsand apply that to a new purchase

My second investment property was a free and clear tax foreclosure bought at the local sheriff's sale. And I bought my third investment property a month later and my fourth investment property eight months after that.

@Thomas W.

There's an unspoken assumption in what you write that most even moderately successful RE investors start from zero cash reserves, save money from their regular jobs and make money through wholesaling and flips with OPM, and then fund their property acquisitions out of their flipping and wholesaling. That's not usually how it works in the real world. It's nice when it does, sure, but in most cases it takes years of saving and investing LOTS OF YOUR OWN MONEY to start.

Once you have some cash in the game there's plenty of stuff you can do to generate more money, like BRRRR, selling properties that have appreciated, more targeted flips done with your money to raise more money, working with hard-money lenders using your real estate as security, and the list gets longer and longer the more properties you have and the more experienced you become.

But the number of people who get into this at first through wholesaling and flipping and successfully make money at these two no-money-down strategies, enough to move on to buying investment properties with the cash their business generates, is really quite small in most markets. Wholesaling is far and away the most difficult way to make money in this game and takes the most hard-won knowledge to do successfully again and again. Flipping requires a number of quality relationships right from the start to be profitable from the get-go.

This is what happens all too often: people go to guru seminars and then get out and try to go through lots of houses to find a great wholesale deal, only to fall flat on their faces, because they underestimate how difficult, risky, and expensive it can be. They also don't understand that the main purpose of the guru seminar they went to was to recruit cheap bird dogs and milk their personal networks for the guru's more established pals.

Sooner or later, though, the burgeoning REIs DO happen on what they feel is a good flip opportunity. At that point, they decide they want to turn flipper out of desperation, like a losing gambler upping his bets as he gets deeper in the hole, steaming hard into complete financial ruin.

@Thomas W.

For investors who are short on cash, partnering is a great way to get into a deal that they may not have otherwise been able to. 

Let's say that Partner A has deal flow, a system in place, a network, and a track record. But no cash.

Partner B has none of the above, but does have capital and is looking for an entry point into real estate.

The two partners can create an operating agreement that specifies the terms of the partnership and then go on to conquer the world :)  

Just make sure to consult with an attorney and CPA for the legal and tax implications. 

We purchased the first rental property using a HML. Within a year of closing we had all of our money out of the property using the $50] cash flow and BRRRR method. Second property was going to bought as a flip, instead I used FHA to move into and currently have it on the market. Used it as my primary residence for 2 years to save a ton on taxes when I sell it. I had friends live with me to help pay the bills. Just closed on third property and second rental a month ago. If rehab comes in even a little over budget we will be able to BRRRR the property and get all of our money out in six months.
Originally posted by @Dennis M. :

Well for starters You buy right and after a year you brrr the property . You live frugal and take every penny of profits from the rentsand apply that to a new purchase

What is the end game? And what is the plan as the market tightens? 

@Thomas W. - The first property was using personal savings. Second property was personal savings plus every penny that I made from the first rental income. Third property was through owner-financing that we will pay off in six months using the combined rental income of all three properties.

Our goal is to become a self-funding investment company, where the rental income pays for all new properties. Currently, we are spending a lot of money out of our own pockets, but each property increases our rate of growth. We haven't even touched refinancing yet.

I recommend the launch pad method. Buy a house for yourself to live in with owner occupy financing. Then in a couple of years (or less sometimes) buy another house and turn the house that you’re moving out of into a rental. My wife have done this with the last three homes. Now we have three sfh’s as rentals and live in the fourth one. I would caution though to make sure every house you buy will make a good rental. I say this because I’m at the end of the launch pad road as the house we currently live in won’t make a good rental.

@Thomas W. this response Is more about your debt to income ratIo than It Is savIng up money: Some banks will let you count 75% of your rental income to offset your mortgage. So if your mortgage was 1000 and you rented the house for 750 you’d be even in their eyes, so you could now use your original income to buy another investment property. I’m currently in the process of doing this and will be closing on my 2nd property in December. I bought my first home conventional for 15% down which was about 22k with closing costs. I’m now ready to buy a home and I have about 20K saves up again.. but it wouldn’t even matter if I hadn’t rented out my first home- because my debt to income ratio got a fresh start basically so now I can afford as much as my income allows. And if you’re going to live in the home and fix it up you can get into it for less money down. I’m buying a foreclosure with a 5% down Reno Loan. And I will live in it for at least a year while I fix it up. This strategy isn’t great for anything huge or long term- since you’re only allowed so many loans from the bank. But it’s good for starting out especially if you have a fixed amount of income that isn’t likely to raise drastically anytime soon. It’s all about the DTI, so get a strong rental so you can repeat! Hope this helps
Originally posted by @Mary Mitchell :
Originally posted by @Dennis M.:

Well for starters You buy right and after a year you brrr the property . You live frugal and take every penny of profits from the rentsand apply that to a new purchase

What is the end game? And what is the plan as the market tightens? 

The end game is get as much real estate as I can before I'm dead .markets tighten and loosen so I'll roll with the changes as REO speedwagon likes to say .

@Thomas W. I don't even remember the 1st house I bought or the 2nd or the 3rd... Now I'm on house number 37 and I honestly have a hard time remembering number 35.. I used to remember all the addresses, now I don't remember any of them, I have to look at some kind of cheat sheet that my wife made me Why? Because I work so hard during the day to make money at my day job, to buy more homes for cash, I can't even take a minute and remember...lol

@Mark Fries I'm only at 12 but I could have written your response for you...lol

@Thomas W. I use the BRRRR method. I used the equity i was able to pull out of my first project to fund the second.
@Thomas W. Private money and Partnerships are the best. If you wish to cash out a property and put it into a larger property you can do that too. It just effectively increases your leverage.
Originally posted by @Mark Fries :
@Thomas W.

I don't even remember the 1st house I bought or the 2nd or the 3rd...

Now I'm on house number 37 and I honestly have a hard time remembering number 35..

I used to remember all the addresses, now I don't remember any of them, I have to look at some kind of cheat sheet that my wife made me

Why? Because I work so hard during the day to make money at my day job, to buy more homes for cash, I can't even take a minute and remember...lol

 Come on, now. Everyone remembers their first house. Just like their first 'experience', if you know what I mean :P  . How could you not remember going from "no investments in RE" to "investments in RE" without remembering how you got started, unless you have Alzheimer's for real?

As for me: first, second, third house from savings via day job and living frugally. All the houses beyond that paid for themselves, as I just kept rolling the cash from one into another into another. Obviously, the more the first couple of houses cost (or the less money you have to start), the longer that might take. 

@Thomas W. I worked very hard and lived frugally to completely pay off my first condo in 5 years while simultaneously building a savings account in case of a financial disaster. I sent my final mortage payment last March. In May, I used my savings to buy my 2nd condo which I purchased using a home mortage loan to get a lower interest rate. My 1st condo is now a rental. I wiIl buy My 3rd condo next year.

@Thomas W.

Some people have a lot of equity in their properties, so they disperse it into other properties. 

@Thomas W. I borrowed the money from a private individual at a ridiculous interest rate. At the time, it was negative cash flow, as the years gone by, refi, it was one of my better decisions no doubt!
@Thomas W. I would be leary about partnerships. If you found a guy with great systems and a track record in place but has NO cash...I would run... Why doesnt he have cash if he has all the other things in place? Everything wants a partnership until they are actually locked into one....then realize they suck and usually regret it.. Make your own path!

@Thomas W. I don't know if I can add anything to this thread that hasn't already been stated. On our first rental we used HELOC money for the down payment. Our second investment property was a commercial property that we used family money to purchase. Then we flipped some houses and increased our credit limits with banks for business lines of credit and other credit sources. Then we started to buy undervalued properties, fixed them up, and refinanced using the BRRRR method. This allowed us to increase our growth to 17 last year and 11 so far this year.

I bought my first property SFH 3 years ago before I knew about BiggerPockets, I only knew I wanted to invest in real estate. I lived in it intending to rent it out at some point. 20% down from savings, 15 year @ 3.125% (!). Then, refi to buy current FHA duplex and make repairs. House hacking now. First house covers itself savings-wise, but no cash for me to really keep yet. Will likely sell and get a decent chunk back. I like the idea ( for now) of moving from one FHA house hack to another keeping all properties along the way. So now it's live frugally and save.

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